>At what point is it best to incorporate a property?
No one else seems to be stepping up, so I will help you. It's not an easy set of questions.
But first, that's not what you call it. You "incorporate" a corporation, not a property or an LLC. You "register" an LLC (with your state's Secretary of State's corporations division). Then you "deed" your property to the LLC. To get taken seriously in any industry and not look like a noob or a boob, you have to learn that industry's lingo. That may be why no one had answered your question yet.
Next, keep in mind that you are asking questions that you need an attorney (and an accountant) to answer completely for your exact situation and location. I am neither. While I have read several books on asset protection, registered and managed dozens of LLC's and incorporated several corporations, I'm also a "Just a Guy on the Internet," so everything I say should be verified.
As an aside, LLCs and corporations are taxed differently. For tax reasons we NEVER use a corporation to hold title to a buy-and-hold property. However, a fix-and-flip investor might be incorporated (and then perhaps claim the subchapter S election so the profits and losses "flow through" to the owner as they do with a partnership or a sole proprietorship), and take title to its projects in the corporation's name. But it can do that because it is only for a short time. For someone holding a property for more than a year, an LLC taxed as a partnership or sole proprietorship is the best vehicle for holding title to real estate.
As you read elsewhere, you can spread your liability around by putting properties into different LLCs, so that, if one LLC is sued, it may not affect the other LLCs (and, hopefully, you personally). However, how many properties you put in each LLC depends on 1.) How much net worth you have; 2.) How much insurance you have; and 3.) How much the properties are worth. If you have little net worth, you're least likely to be a target for a lawsuit above the amount of insurance you carry.
Yes, I use LLCs to hold title to my buy-and-hold properties, but I don't register a new one for each property due to the expense and record-keeping issues. Remember: Liability insurance is most investors' main source of liability protection. It's cheaper than an extra LLC in most cases, as you're about to learn. Always carry at least enough TOTAL liability insurance to cover at least your net worth (most people don't). Upon the advice of my insurance agent, I keep my business, property, car and home insurance liability coverage low and have an "umbrella" liability policy for 1.5x of my net worth, which kicks in if property or car or business insurance isn't enough. I pay like $300/year for it. If I get sued, the insurance company is going to sic its own attorneys on it, perhaps teaming up with the property or car insurance attorneys. The more coverage you have, the harder they are going to work protecting you.
Each new LLC costs $50-$250 to register with the state. For each one, you also have to file a form and pay $10-$100 to the state every year (most states, anyway...I'm blessed by living in one where the Sec. of State never knows the status of the LLC after it is filed). If you're smart, you will pay a registered agent company $100-$200 to register the LLC for you, plus $50-$100/year to serve as your registered agent and official address. That is so tenants, lawyers, etc. can't easily connect your personal name and address to the LLC in the state's records. Anonymity is very useful in this business! As you are about to learn, it will also help show a judge you've been serious about keeping your business and personal lives and finances separate.
LLCs and corporations require recordkeeping. You may need to prove one day that your LLC is a completely separate entity from all of your other LLCs or corporations and your personal life. Each LLC and corporation must look like independent businesses that makes their own decisions. Otherwise, a plaintiff's attorney may be able to "pierce the corporate veil" by showing, "Defendant claimed he operated a separate business, but he really wasn't, and here's why: He used his own bank account, he used his personal credit card on company business, he used his home address, he never held an annual meeting, he didn't record the decisions that the business supposedly made, etc." So you need to keep a good Company Record Book that has all of your LLC records in it, including minutes of an annual meeting (if your state requires one). I also keep resolutions for each major decision (involving over $1000) made by my LLC. It's easy and doesn't take long. And, because each LLC has its own bank account and tax ID (more on that later), it needs its own financial records; I have a separate Quickbooks file for each LLC. I do my own bookkeeping; if you can't, expect to pay $25/hr. or so to get it done.
Most business checking accounts aren't free; average is about $15. That's $180/year for each LLC.
Each March 15, you have to file a partnership return with the IRS if your LLC has more than one member. (Partnership returns are the least-audited returns, so I always make each LLC a partnership...99% owned by me, 1% owned by my management corporation.) That means each LLC needs its own state and federal Tax ID numbers. (Also required before you can open a bank account in the LLC's name.) You have to pay an accountant around $450 to prepare each partnership return (I've seen 'em for $250-$600). If you also use a bookkeeper to keep the LLC's books, you need to budget for that.
To review: You will spend $150-$450 for each LLC you register, plus $600-$1000 per year. Call it an average of $75/mo. You must also keep good records.
Given all this, how many LLC's do you want to control? If you have some $100,000 rental houses that net $100/door per month in cash flow, do you want to give three-fourths of that away in return for the additional liability protection offered by a different LLC for each? NO! You should put several houses in that LLC in order to spread the overhead costs off the LLC among several. Personally, $250,000 in equity is my rule of thumb: If a single property will have $250,000 or more in equity from the start, it gets its own LLC. If not, multiple properties get combined into an LLC until there is $250,000 in equity there. But you should set your own limits after talking with your attorney and accountant.
Alright, to your original question: WHEN to have the LLC take title. For 1-4-family homes financed with traditional financing, don't do it until AFTER closing. Banks don't like it. They are loaning to YOU, not a business. This is not a business or commercial real estate loan, it's a residential loan (even if the property will be used for investment). They want to easily sell that mortgage after you close, so they want a squeaky clean deal. Don't even bring it up.
For a 5+ family property, or a loan covering several 1-4-families, you'll be getting a commercial loan. Commercial lenders are very comfortable with LLCs. If they give you any trouble about starting out with the title in the LLC's name from the start, find another bank.
Now as to HOW to take title in the LLC's name. The day after closing, you could record with the county a deed that transfers all of your interest in the property to your LLC. A quit-claim deed might do it, but get a real estate attorneys' advice (not your regular business attorney) about which deed is best. The LLC could also record a memorandum of assumption that says the LLC assumes the loan and all responsibility for making the mortgage payments. But that could also just be kept in the LLC's Record Book because it isn't really needed except if you get sued and you're trying to show the court that the LLC is separate from you personally.
Can you still do a cash-out refi on a 1-4-family that's now been quit-claimed to your LLC? I actually have never tried, but I will say that it SEEMS like, if worst came to worst, they would make you quit-claim it back to you personally, and, after the loan closes, you could just go quit-claim it back to the LLC. But that is just what seems to make sense, and I am in no way certain about it. Call a lender and ask them!
Alright, hopefully, at least 80% of what I just wrote is true...it's up to you and your professionals to figure out which parts. So treat this as background info only, provided by "A Guy on the Internet." Total value: $0.
Damn, good thing I type 80 words a minute or I would never do this. Why do I feel like no one will read this far? (And, I KNOW that, within 2 weeks, someone else will post the same questions again, expecting someone to write it all over again...instead of just finding this post and reading it.)
If you read this far, then Happy Super Bowl Day!
Go Team, Beat Opponent!
